Last week we explained that any dealing with an Israeli bank that involves interest, whether as the borrower or the lender (i.e., depositor) requires a heter iska.
As mentioned, the heter iska stipulates that the lender is considered an investor, and the money which the borrower returns to the lender, in excess of the principle, is really the profit of the investment and not interest on the loan. This raises some questions, though.
If the transaction is really an investment, the borrower’s monthly payments should be linked to the success of the investment. However, we know that practically, the borrower’s monthly payments to the bank don’t fluctuate, but that rather he pays a set amount every month, (i.e., the interest rate). How does that work? What if the investment didn’t garner a profit?
The rationale is as follows. Rather than the borrower needing to report his profits each month, the two parties mutually agree that the borrower retains the right to pay a monthly settlement. As long as the borrower returns the pre-agreed settlement amount, the lender has no right to demand more. Therefore, in a loan covered by a heter iska, the interest rate is actually the predetermined amount which the borrower can return in lieu of the actual profits.
If the investment did not profit, the borrower may refuse to pay the monthly fee. This is a crucial point; because forcing the borrower to pay a return on the investment, even if it didn’t profit, is a form of ribbis.
However, the heter iska stipulates that the lender must prove the lack of profit by making a shevua, an oath. As long as the borrower does not take an oath affirming the lack of profit, it is assumed that the investment profited. Since most people are very reluctant to make a shevua, the lender’s investment is relatively safe.
In summary:
- The money given to the borrower is an investment, not a loan.
- The lender is therefore entitled to the returns.
- The interest rate is the settlement that the borrower returns in lieu of fluctuating profits.
- If the investment did not yield profit, the borrower may swear to absolve themselves from returning the monthly settlement. .
Consequently, the heter iska does not solve every potential ribbis and has limited application, as we will learn in the coming weeks.
